BoE’s Bailey makes heavy hints on TBTF

January 14th, 2011

We already know that financial regulation is due for a radical shake-up in the UK, but Andrew Bailey, executive director and chief cashier at the Bank of England, has given the clearest signal yet that the structure of the banking sector will also be overhauled.

As far as microprudential supervision is concerned, we are clear that it should not be a regime in which firms cannot fail. A successful industry of any sort needs to have means by which unsuccessful firms can fail without an unacceptable cost to the public, and where appropriate means by which firms can recover from serious problems without having recourse to a formal resolution process.

Banking still suffers from the too big, too complicated, too interconnected to fail problems. This has meant that public money has had to be used to prevent disorderly failures. Achieving a regime in which orderly failures can occur without recourse to public money is a vital part of the redesign of regulation.

Reading between the lines, isn’t Bailey hinting that “too big to fail” banks — which in the UK include Barclays, HSBC, Lloyds Banking Group, RBS and Santander/Abbey — will no longer be tolerated? Was Bailey giving a coded signal to Sir John Vickers’ Independent Banking Commission that it’s okay to break these behemoths up? If so, the process of cutting them down to size is not going to be an easy one.

In an earlier speech in London, Bailey, who is due to become number two in the new Prudential Regulatory Authority, which will sit within the BoE, said:

“Shifting to a regime where failure is possible not only changes the structures and incentives of banks and their investors, but it also changes the style of regulation.”

In his Edinburgh speech Bailey also said that the proposed regulatory reforms would fail unless there is a clear consensus that financial stability should be the primary goal of financial policy-making — not more peripheral matters like consumer protection or competition. He also lamented what the [self-deluded fools] who ran HBOS and RBS in 2000-08 had done to Scotland’s banking sector

It pained me, in my role as the person responsible for resolving a number of these problems, to see the lack of regard for the basics of a well-run bank, the foundations which must be there to be sound and successful. I have spent the last seven years also responsible for the Bank of England’s banking operations, and I know from this experience that unless you really understand your balance sheet and its risks, the systems and control environment that supports the balance sheet, and you have the basics needed well covered – the reconciliations work, the right management information available promptly – you aren’t doing your job.

Short URL: http://www.ianfraser.org/?p=3271

Posted by Ian Fraser
on Jan 14 2011. Filed under Blog.
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